For younger investors, who’ve been happily watching their savings grow during an 11-year bull market, this may be their first time experiencing a crash and the accompanying fears of a recession. For those nearing retirement or who are already there, a turbulent market could diminish their nest egg and leave a giant hole in their income plan.
Some will flee the market as it plummets — or sit and do nothing. If forced to choose, I often feel that the latter is the better choice of those two options. Investors who sell during a panic with the idea of getting back in when things improve may miss out on the market’s best days.
However, sitting on your hands isn’t necessarily the only or best thing an investor can do when the market is roiling. Here are just a few strategies you might consider implementing now to reinforce your retirement plan.
Consider “buying the dip.”
For long-term investors, the current market downturn represents a buying opportunity. Investors like Warren Buffett are known for waiting for market events like this to find some bargains. It’s a strategy that may make sense for younger investors who are looking to give their portfolio a boost (as long as they have enough money set aside to pay their bills if they get sick or lose their job).
Retired investors who have enough guaranteed income to cover their expenses while they wait for a rebound also may want to look for some deals. Just be sure to do your research (or consult with your financial adviser) and look for quality companies that have good management and growth potential.
Seize the moment to do a Roth conversion.
Whole generations of Americans, from baby boomers to millennials, have been trained to save for retirement in tax-deferred investment accounts (traditional IRAs, 401(k)s, 403(b)s, etc.). What many don’t realize, until it’s too late, is that they could face a sizable tax bill when they start withdrawing that money. Many advisers already have been urging their clients to convert all or some of their tax-deferred savings to a Roth IRA and pay the taxes while tax rates are low (thanks to reforms that are scheduled to sunset at the end of 2025).
If you’ve been considering a Roth conversion to take advantage of those lower rates, why not think of the current market dip as another nudge to get it done? You could do it now, pay the taxes and, as the market comes back, allow your assets to accumulate in a tax-free bucket. Withdrawals from a Roth IRA will be tax-free, as long as you’re at least age 591/2 and the account has been open for five or more years.
Put your stimulus check to work for the future.
If you haven’t already, many of you should be receiving a stimulus check as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. Single filers with an adjusted gross income (AGI) of $75,000 or less will receive $1,200, and those who are married filing jointly with an AGI of $150,000 or less will receive $2,400 (plus $500 for each child under 17). After that, the payment drops by $5 for every $100 of income.
If you need that money for bills, then put it in the bank or wherever you keep your emergency fund. But if you don’t need it, you might consider using the money to buy those “bargain” stocks or to pay the taxes on your IRA withdrawals if you choose to do a Roth conversion.
Rethink 2020 RMDs.
The CARES Act also waives the required minimum distributions (RMDs) retirees would have had to take from their tax-deferred accounts in 2020. This waiver, designed to help retirees reduce their 2020 tax bill, also presents an opportunity for those who could benefit from a Roth conversion. To be clear, Roth conversions are treated as rollovers for income tax purposes, and RMDs cannot be rolled over. But you could take the amount you already expected to pay this year, or some portion of it, and put it into a Roth account.
Again, this strategy isn’t for those who will need the money to cover their day-to-day expenses this year and could benefit from the lower tax bill. However, if you expect taxes to go up in the future (and many experts do), this is a way to help protect your nest egg.
Accelerate inherited IRA distributions.
If you’ve inherited a non-spouse IRA that’s been set up to be distributed over five years, you may want to look at accelerating those withdrawals to take advantage of lower tax rates in a lower income year. Once the funds are distributed and the taxes are paid, the money is yours to do with as you wish. If you don’t need it for living expenses, your options might include putting it into a non-qualified brokerage account, an annuity or some other investment.
Consider investing in a 529 college savings plan.
If you’ve been looking for a way to help your kids or grandkids with the high cost of a college education, now might be the time to get more bang for your buck with a tax-advantaged 529 savings plan. Plans vary by state, but generally account holders can choose from a range of investment options, and many offer target-date funds that become more conservative as the beneficiary gets older. These plans offer tax-deferred growth potential and tax-free withdrawals when savings are used for qualified education expenses, and some states offer a state income tax deduction for contributions. There also can be estate-planning benefits. (Some plans have minimum contributions, but your stimulus payment should provide more than enough to get you started.)
Some of these strategies can be complex and may require getting professional help. But these are moves you can make now that could improve your life down the road. Don’t let fear or uncertainty keep you from doing what it takes to secure your financial future.
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(Article written by Andrew Greer)